Markets & Finance

Jobs: A Less Cruel April

Action Economics expects the May 8 U.S. employment report to show job losses slowing to 600,000 in April, though the jobless rate should jump to 9.0%

A broad confluence of data now suggest that the long anticipated second-quarter moderation in the pace of U.S. economic decline indeed took form in April, following the hefty economic contraction over the prior two quarters. The risk in the April employment report, scheduled for release May 8, is that this shift in the pace of decline will emerge sooner rather than later in the U.S. payroll figures, though payroll declines that are historically large should nevertheless continue through the quarter, and the jobless rate should still climb.

Action Economics expects a 600,000 U.S. nonfarm payroll drop in April that would prove smaller than the 685,000 average decline in the first quarter and the peak decline of 741,000 last January. The projected April drop would be the smallest since last November's similar 597,000 total.

Though the projected April drop is still large, it should prove part of an extended pattern of diminishing declines that should allow a resumption of positive payroll growth by the end of the year.

We also expect the April jobs report to reveal an unchanged average workweek at a cycle-low 33.2 hours, a fourth consecutive 0.2% aveage hourly earnings gain, and a jump in the jobless rate to 9.0% from 8.5% that would leave the highest unemployment figure since 1983.

An Upside Surprise in Services

Since September, we have seen a broad contraction in the level of payrolls across all major industries except Education & Health, which has posted average monthly job growth of 28,000 per month over the period. There is little reason to expect a shift in the mix for April. Declines should again be broad-based, though the improved tone in other recent economic reports suggests a moderation in the magnitude of declines across industries.

Here is a look at some of the data that factored into our forecast:

The ADP Employment private payroll survey for the month, released May 6, revealed a 491,000 April drop, which would be compatible with a -486,000 April nonfarm payroll estimate given a 5,000 assumption for government employment growth. The industry breakdown for April showed that the upside surprise for this measure was concentrated entirely in services, with "only" a 229,000 drop, alongside a 262,000 drop for goods producers and a 159,000 decline at factories that almost exactly match our own forecasts.

The ADP figures broken down by company size continue to show a skewing of job loss toward medium- and small-sized firms vs. large firms relative to what we saw in the last recession, in 2001.

The weekly initial jobless claims figures fell to 631,000 for the week ended Apr. 25 and is averaging 635,000 thus far in April, which leaves recent measures well below the 27-year high of 674,000 hit during the week ended Mar. 28, and below the 657,000 March average as well. Current claims figures are more in line with the 637,000 average in February, though well above the 572,000 January average, and certainly above the sub-400,000 figures as recently as June. Continuing claims are still setting new highs, as these figures historically continue to climb until job growth returns to the underlying growth pace for the labor force.

Positive Clues in Sentiment Surveys

The consumer confidence surveys have also revealed a notable improvement in recent months, with particularly big bounces for some measures in April. The April University of Michigan's consumer sentiment survey surged to 65.1 from 57.3 in March, while the Conference Board's consumer confidence survey jumped to 39.2 from 26.9. Consumer confidence is still at historically depressed levels, but the improvement suggests a diminishing payroll downdraft.

The various factory sentiment reports also revealed big improvements in April. The April employment component of the Institute for Supply Management's manufacturing survey improved to 34.4 from 28.1, while the employment component of the ISM nonmanufacturing report jumped to 37.0 from 32.3, alongside gains in the employment components of all the other major sentiment indicators.

Housing data have also recently indicated that the sector appears to be stabilizing, with bounces in most of the February readings that were either only partly reversed by some measures in March, such as with housing starts and permits as well as new and existing home sales, or with continued gains, as seen with the Mortgage Bankers' Assn. purchase data and the National Assn. of Home Builders' index.

Similarly, auto sales appear to have stabilized following the steep drop in 2008. The February sales rate of 9.1 million units was the weakest since December of 1981, though sales rates have since bounced to 9.8 million in March and 9.5 million in April.

In total, the monthly payroll figures are poised to reveal a diminishing pace of decline through the three months of the second quarter, and the April report on May 8 runs the risk of potentially front-loading some of this improvement, given the recent pattern of upside surprises in other April reports that may also emerge in the jobs data. Though the jobless rate should continue to rise through yearend, as payrolls continue to fall short of the typical 100,000-120,000 monthly gains for the labor force, payroll declines are likely to diminish with each passing month.